Pactiv Evergreen Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 10 speakers on the call.

Operator

Good day,

Speaker 1

and thank you for standing by. Welcome to the Pactiv Evergreen First Quarter 2024 Earnings Conference Call. At this time, participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Curt Worthington, Vice President of Strategy and Investor Relations.

Speaker 1

You may begin.

Speaker 2

Thank you, operator, and good morning, everyone. Welcome to our Q1 2024 earnings call. With me on the call today, we have Michael King, President and CEO and Jon Bakst, CFO. Please visit the Events section of our Investor Relations website atwww.pactiveevergreen.com and access our supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation.

Speaker 2

Before we begin our formal remarks, I want to remind everyone that our discussions today will include forward looking statements, including those regarding our guidance for 2024. These forward looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by our forward looking statements. Therefore, you should not put undue reliance on those statements. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings, including our annual report on Form 10 ks for the year ended December 31, 2023, and our quarterly report on Form 10 Q for the quarter ended March 31, 2024, for a more detailed discussion of those risks.

Speaker 2

The forward looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward looking statements, except as required by law. Lastly, during today's call, we will discuss certain GAAP and non GAAP financial measures, which we believe can be useful in evaluating our performance. Our non GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to the most directly comparable GAAP measures are available in our earnings release and the appendix to today's presentation. Unless otherwise stated, all figures discussed during today's call are for continuing operations only. With that, let me turn the call over to PACCARB Evergreen's President and CEO, Michael King.

Speaker 2

Mike?

Speaker 3

Thanks, Kurt, and good morning, everyone. Thank you for joining us today. Let me begin by commending our team on their efforts and contributions during the Q1 of 2024. The team's dedication to our continuous improvement culture and commitment to delivering for our customers positions PACTIVE Evergreen to adapt to dynamic market conditions and create value for all stakeholders. Turning to Slide 4.

Speaker 3

I'll start by highlighting the progress we made against our strategic priorities during the Q1. Then I'll discuss some internal and external dynamics we have been observing and actions we are taking to position the business for long term success. John will then provide updates on our key financial metrics and discuss our outlook for 2024. At the end of the call, we'll open it up for Q and A. Turning to Slide 5.

Speaker 3

I will start with a few key themes that underpin our performance during the Q1 and also provide some context on our progress against our strategic priorities. First, despite the Q1 presenting us with an irregular business environment, our team delivered solid results. Adjusted EBITDA for Q1 of 2024 was $168,000,000 which was at the high end of our guidance provided during our Q4 earnings call. Our results largely reflect a lower pricing environment, which was partially driven by lower raw material costs and the cumulative effect of sustained price inflation on consumer spending resulting in lower volumes. We also saw higher employee related costs, partially offset by lower manufacturing and transportation costs.

Speaker 3

Volumes decreased 3% in the quarter compared to prior year, primarily due to a focus on value over volume in the food and beverage merchandising segment. Volumes also reflected the market softening amid inflationary pressures. During the Q4 earnings call, we highlighted weather related reductions in restaurant food traffic and the residual impact on our customer supply chains. We were able to mostly offset this dynamic as well as the impact it had on our results. 2nd, we find ourselves navigating a landscape that remains dynamic.

Speaker 3

While there are signs the economy is still buoyant and overall inflation has moderated compared to the last 2 years, we hear from our customers that the financial health of the average consumer in the United States is still strained. Since early 2020, consumer prices have increased 21%, while food prices have increased 26%. At the same time, reports indicate that the total household savings have been depleted to below pre pandemic levels. The net effect is a cautious consumer who is still adjusting to a potentially lasting step change in the cost of living. 3rd, I want to underscore that we are executing on a multiyear playbook of cost management initiatives.

Speaker 3

As I mentioned earlier, the broader market environment remains dynamic. We believe our disciplined approach and focus on managing our costs will help us navigate the current market conditions. For manufacturing cost reductions to logistics process improvements, our teams are focused on identifying inefficiencies and eliminating unnecessary expenses. We expect sequential improvements into the second half of the year, providing an additional layer of earnings momentum in 2024. While we expect the effects from the recent inflationary uptick to persist through the Q2 before seeing signs of improvement during the second half of the year, our focus remains on building volume momentum.

Speaker 3

We are leveraging our long standing partnerships with blue chip customers in addition to our innovative product portfolio to gain share across our end markets. On that front, we've entered into agreements with new and existing customers across our business, including QSRs, distributors and CPG customers and expect those to ramp up during the second half of twenty twenty four, demonstrating our ability to execute and win. We continue to invest in robust data analytics that enable us to better allocate resources to the markets that maximize our profitability. We are then able to leverage this capability to make that ultimately guide our portfolio and underpin our value over volume approach. We are also prioritizing our customer service levels, which have remained strong.

Speaker 3

The actions we are taking today are consistent with our transformational journey and we believe they position us for long term sustained growth. 4th, we are reiterating our full year outlook. While John will provide greater detail around our specific assumptions, I want to provide some context. We are well positioned and expect to see an improvement in volumes during the second half, partly due to seasonality, but also due to our pipeline of customer wins, which are expected to ramp as we progress through the rest of the year. In addition, we have line of sight to a number of cost saving actions through the second half of twenty twenty four that we expect to help us generate year over year adjusted EBITDA growth.

Speaker 3

Given the actions that we have taken previously, our company is better equipped to adjust to market signals than in past years. We are able to scale quickly to evolving market conditions while simultaneously capturing cost savings opportunities. Regarding the recent rise in inflation data, which is a bit of a divergence from previous multi year improvement trend, we do not currently anticipate a meaningful change in the market dynamics during the Q2. The recent uptick in inflation and the resulting effect on both the consumer and our customers persist beyond the Q2, we would expect our full year guidance to come in at the lower end of our guidance range. Turning to Slide 6, I'll address other key drivers influencing our performance through 2024.

Speaker 3

Year to date restaurant foot traffic is down compared to last year, reflecting weakened consumer health and continued trading down to lower cost food options and to a lesser extent, the severe weather experienced in January. We continue to leverage our unique value proposition with our customers, which we believe has allowed our foodservice business to outpace its end markets and has supported strategic value over volume decisions within our food and beverage merchandising segment. Over the last few months, the pace of inflation has accelerated, which has made the current environment less conducive to a volume improvement. Many of our customers that were able to grow earnings over the past several years by trading volumes for pricing are leaning more heavily on their own cost structures to offset heightened price sensitivity by consumers. We have reached a point where after several years of persistent inflation, consumers are less able to absorb further food price increases.

Speaker 3

While commodity input costs have trended down over the past 2 years, recent macroeconomic developments suggest that raw material costs may trend a bit upwards. For example, the price of oil has recently increased, which has introduced more volatility in resin prices compared to last year. That said, we ultimately pass the resin costs on to our customers and do not expect recent volatility to have a material impact on results in the near future. We are also taking actions to mitigate the impact of higher oil prices on our transportation costs. We continue to monitor and navigate the dynamic nature of our business.

Speaker 3

We are confident in the actions we have taken over the last several quarters to position us to deliver against our long term strategy as evidenced by our Q1 results. With that, I would now like to turn the call over to John. John? Thank you, Mike.

Speaker 4

I'll start with our Q1 highlights on Slide 8. Before I cover the results in detail, I'll provide some context for our performance in the quarter. As we outlined in March, we expected our Q1 results to be impacted by lower volumes and the continued adjustment of consumers to higher for longer inflation. We also outlined the actions we're taking to build earnings momentum for the remainder of 2024, including volume growth and cost improvements. Based on that backdrop, Q1 was generally as expected.

Speaker 4

We reported net revenues of $1,300,000,000 for the quarter, which represents a decrease of about 13% compared to last year. The decrease was largely due to the closure of our Canton, North Carolina mill operations during the Q2 of 2023, lower pricing due to the pass through of lower material costs and lower sales volume. Lower sales volume generally reflected a focus on value over volume in the food and beverage merchandising segment and market softness amid inflationary pressures. Excluding the impact of the Canton Mill closure, our revenue was down approximately $95,000,000 or 7%. Overall, volumes were down 3% in the quarter.

Speaker 4

Foodservice volumes were slightly negative year over year, but outpaced industry foot traffic trends, which were down more than 3% during the quarter. Food and beverage merchandising volumes decreased mainly due to strategic value over volume decisions as we continue to optimize the portfolio. Underlying industry demand in food and beverage merchandising was roughly flat outside of those actions. Price mix was down 4%, which was mostly a function of lower contractual pass throughs driven by lower raw material costs compared to the prior year period. Adjusted EBITDA was $168,000,000 at the high end of our guidance range provided in March, but an 11% decrease compared to the prior year.

Speaker 4

The decrease in adjusted EBITDA reflects lower pricing, net of material cost pass through, reduced sales volume and higher employee related costs, partially offset by favorable manufacturing and transportation costs. Our adjusted EBITDA margin was 13.4% compared to 13.2% in the prior year period. Our year over year adjusted EBITDA comparison also reflects the one time impact from the extension of key business of approximately $8,000,000 in Q1 of last year. This had a positive impact on prior year adjusted EBITDA margins. During the Q1, free cash flow was negative $74,000,000 which was impacted by seasonal factors, including typical inventory build ahead of the summer season in Q2 and Q3.

Speaker 4

By comparison, during Q1 of last year, we experienced a working capital benefit as we were in the process of working down our strategic inventory build from 2022. Entering this year, our inventories were closer to normalized levels. As a result, I would characterize the inventory build in Q1 as more typical for our company. We remain committed to deleveraging our balance sheet and are focused on maximizing long term free cash flow generation. From a quarter over quarter perspective, revenues declined 2% due to lower sales volume.

Speaker 4

The decrease is generally driven by seasonal trends in the Foodservice segment. Adjusted EBITDA was 19% lower, mostly due to higher manufacturing and material costs and lower sales volume primarily due to seasonal trends in the Foodservice segment. Continuing to Slide 9, we will look at results by segment beginning with Foodservice. Net revenues were down 3% year over year, mainly due to lower pricing, reflecting the pass through of lower material costs and unfavorable product mix. Volumes are down marginally.

Speaker 4

Foodservice is still contending with challenging consumer dynamics, but we believe our business is more resilient than the broader industry, with our segment volumes outpacing industry foot traffic data. Price mix was down 2%, reflecting lower than expected demand from some of our higher margin transactional relationships as well as a higher weighting to lower margin product categories. Price was down slightly due to the lower contractual pass throughs. As Mike previewed during his prepared remarks, we have started to see increased price sensitivity from some of our foodservice customers. While we were largely able to offset this dynamic during the quarter, we anticipate this headwind will persist through the balance of the year.

Speaker 4

Adjusted EBITDA decreased 15% compared to last year to $90,000,000 and adjusted EBITDA margins decreased by just over 200 basis points. The margin variance reflects unfavorable product mix, higher manufacturing costs and lower pricing, net of cost pass through. On a quarter over quarter basis, our results were impacted mainly by lower volumes, which are attributable to seasonal trends. Similar to our year over year comparisons, our volumes on a quarter over quarter basis outperformed broader industry foot traffic trends, which is consistent with our strategy to align with customers winning in their respective end markets. Net revenues were down 5% sequentially, mostly due to seasonal volume dynamics, adjusted EBITDA declined 20%, driven by lower sales volume and higher manufacturing costs.

Speaker 4

Turning to Slide 10. Food and Beverage Merchandising experienced a continuation of the themes from the 4th quarter as retail food at home prices are still elevated compared to historical levels despite moderating more noticeably than food away from home prices. The end result is that consumers are curbing their spending and weighing their budgets towards staples like protein and eggs. Our produce packaging benefited from easier comps as heavy rains and flooding in California last year delayed the harvest into the later part of 2023. Our beverage carton business also benefited from non dairy drinks that utilize our packaging formats.

Speaker 4

On a year over year basis, net revenues were down 22%. Blinds are down mostly due to the Canton, North Carolina mill closure in May 2023 with lower pricing, largely due to the pass through of lower material costs and lower sales volume. Excluding the Canton impact, volumes were down 4%, mainly due to a focus on value over volume and lower demand for discretionary food products like bakery items. Adjusted EBITDA decreased 1% compared to the last year, primarily due to lower sales volume, unfavorable product mix, lower pricing net of material cost pass through, partially offset by lower manufacturing costs. Adjusted EBITDA margins increased by just over 300 basis points due to progress in our beverage merchandise restructuring.

Speaker 4

Q1 of 2023 also included the one time impact from the extension of key business of approximately $8,000,000 in Q1 of last year mentioned previously. On a sequential basis, net revenues were up 1% due to a marginal improvement in sales volume, while pricing and mix were consistent over the prior period. Adjusted EBITDA declined 12%, largely due to higher manufacturing and raw material costs, partially offset by lower transportation costs. Turning to Slide 11. We have a summary of our balance sheet and key components of our cash flow.

Speaker 4

The slight uptick in our leverage during the quarter was expected as a result of an increase in net debt and lower LTM adjusted EBITDA. However, we still anticipate ending 2024 with a net leverage ratio in the high 3s. In terms of free cash flow, we experienced a $74,000,000 outflow, which partially reflects lower profitability compared to last year as well as a seasonal inventory build heading into the summer months. On Wednesday, we further amended the credit agreement to increase the capacity on our revolving credit facility from $250,000,000 to $1,100,000,000 materially enhancing our available liquidity and extending the maturity date to May 1, 2029. We also amended the applicable interest rate and other pricing terms, including by replacing the facility fee with a lower fee on unutilized capacity.

Speaker 4

There were no other material changes to the terms of the credit agreement. As it relates to our capital allocation priorities, our approach remains aligned with our long term strategy and underlying consumer trends. We are committed to delivering profitable growth, which in turn will allow us to meet our goals to delever the balance sheet and preserve liquidity. Our strong cash flow generating capabilities provide us with the opportunity to reinvest in our business for growth and we believe these actions will enable us to serve our customer base more effectively and operate more efficiently while enhancing returns to stakeholders. Turning to Slide 12.

Speaker 4

As Mike mentioned, we are reiterating our financial guidance for fiscal 2024, including our adjusted EBITDA range of $850,000,000 to $870,000,000 We expect near term challenges such as lower consumer demand to persist into the Q2. That said, we are also optimistic about the actions we are taking to mitigate costs, drive operational improvements and increase volumes during the second half of the year. As Mike noted earlier, our Q2 results may be unfavorably impacted by the recent rise in the consumer price index and overall food prices in March, which may temper the magnitude of the volume inflection outside of typical seasonal factors during Q2. Against that backdrop, we believe the actions we have taken to build volume momentum in the second half of the year in addition to cost reduction initiatives we have implemented position us to achieve adjusted EBITDA within our full year guidance range. To put a finer point on the second half inflection we are guiding to, we expect an improvement in adjusted EBITDA for the second half of the year of more than 30% compared to the first half.

Speaker 4

Approximately half of that improvement is related to our Pine Bluff Mill, which just completed a planned outage in April. For the remaining sequential adjusted EBITDA growth, volume accounts for the majority of the expected improvement, while the remainder is attributable to cost savings and favorable price mix. For further context on the volume growth component, we expect most of that to be driven by seasonality and general market improvement with the remainder resulting from our strategy of aligning with core customers that are outperforming their end markets. In addition, our full year guidance is based on modest improvement in industry volumes predicated on continued moderation in inflation throughout the year, coupled with expanded volumes with several new and existing customers. If inflation pressures persist and impact the consumer, our full year results will trend towards the lower end of our guidance range.

Speaker 4

Our full year guidance for capital spending and free cash flow remains unchanged versus our original guidance, and we still expect net leverage to be in the high-3s by year end. With respect to the beverage merchandising restructuring, we have narrowed our guidance to approximately $160,000,000 of cash restructuring charges and approximately $330,000,000 of non cash restructuring charges. As of Q1, we have recorded substantially all of the expected restructuring costs for that initiative. With respect to our footprint optimization plan, the expected restructuring charges remain at $50,000,000 to $65,000,000 and total non cash restructuring charges remain at $20,000,000 to $40,000,000 These costs are expected to occur in 2024 2025. We will provide further updates on the footprint optimization as it is implemented.

Speaker 4

To wrap up, our Q1 tracked closely to our expectations, driven mainly by the actions we undertook to position our business for second half momentum and long term growth. While we expect relative weakness in the near term, we are confident in our plans for the rest of the year. Within both segments of our business, we expect to deliver margin expansion in the second half of the year, paired with improvements in the trajectory of volume and mix. Our team remains focused on executing our strategy and positioning our business to build momentum and achieve our full year guidance. With that, I'll turn the call back over to Mike.

Speaker 3

Thanks, John. Before we open up the line to Q and A, I want to reiterate that we believe we have a robust platform that enables profitable growth and sustainable returns long term. We're an industry leader in food service and food and beverage merchandising and remain focused on generating sustainable returns. Our management team has demonstrated a willingness to optimize the portfolio and deliver on our commitments. We continue to leverage our long standing strategic partnerships with our customer base, many of which are blue chip companies and are constantly working to innovate and develop the highest quality sustainable products.

Speaker 3

We expect that the actions we are taking today will yield solid adjusted EBITDA and free cash flow generation, which we carefully manage to drive deleveraging and further growth through our disciplined capital allocation process. In closing, I would like to thank all of the Pactiv Evergreen workforce for their continued commitment and hard work. I would also like to thank our valued customer and vendor partners for their continued commitment to our mutual success. That concludes our prepared remarks. With that, let's open up the line to questions.

Speaker 3

Operator?

Speaker 1

And our first question will be coming from Anthony Pettinari of Citi. Your line is open.

Speaker 5

Good morning. This Brian Bergmeier on for Anthony. Thank you for taking the question. Maybe just to start, just a question on kind of the revised outlook. I totally understand that ongoing inflation is concerned.

Speaker 5

Can you just maybe help us kind of understand the magnitude? Is it greater on the top line in the form of consumer spending and volumes? Is it going to be greater on the bottom line from rising costs? And can you help us frame maybe which segment is seeing the greater impact right now?

Speaker 3

Yes, I'll take the front end of that. So we reiterated our guidance. We didn't revise our guidance. So I just want to make sure we get that out there. Got it.

Speaker 5

Got it. Yes, definitely.

Speaker 3

Yes. And then, John, I don't know if you want to follow-up with.

Speaker 4

Yes, sure. I'll reiterate a few comments that I made in the prepared remarks here just to give you a sense of where the improvement is coming from. So the second half improvement, we're expecting 30% growth year over from the first half to the second half from an EBITDA perspective. So 50% or approximately 50% is coming from Pine Bluff. So I mentioned we had a planned outage in April, which is now behind us.

Speaker 4

We also had some weather related downtime at that mill in the Q1. So there will be a meaningful improvement from just the operations of Pine Bluff. The remainder, the majority is driven by volume. Some of that is seasonality going into the back part of the year. Part of that is general market improvements as some of the current market environments, we're expecting some easing there.

Speaker 4

And as we mentioned, growing with some key customers. And so we've had some customer wins that will ramp up with some volume going into the second half of the year. The remainder is cost savings and some favorable price mix that we're expecting.

Speaker 5

Got it. Got it. Thank you. Thanks for the detail. And then maybe just on those new business wins that you flagged, you've been talking about winning alongside your strategic customers for a while now.

Speaker 5

Maybe just which end market is maybe winning the most? It sounds like it's in QSR. And then is there any sort of trends? Are people asking for more paper, more plastic? Is it about cups or trays?

Speaker 5

Just any detail on kind of where those business wins are? Thanks. I'll turn it over.

Speaker 3

Yes, good question. So yes, I wouldn't say it's in any one segment. I'd say we're kind of seeing our partnership across all of our end markets yield success. So as we've partnered both on the beverage and food merchandising side as well as the food service side, we're seeing new volume and share gains in just about every one of our channels. I would tell you, we are not seeing any substrate major substrate shift or anything at the moment.

Speaker 3

It's really pretty mixed across both fiber based and poly. So hope that covers it.

Speaker 1

One moment for our next question. And our next question will be coming from Ghansham Panjabi of Baird. Your line is open.

Speaker 6

Hey, guys. Good

Speaker 3

morning. Good morning.

Speaker 6

Michael, just kind of going back to your comments and just trying to reconcile them. So at least from our vantage point, last year was the year of recession if you sold into the CPG channels. And it's logical to assume that that sort of morphs into the foodservice channel as well. Is it your assumption that I mean, are you assuming that things get tougher in terms of foodservice as the year goes on? Or are you actually seeing that?

Speaker 6

I'm just trying to disaggregate your comments.

Speaker 3

Yes. So if you take Q1 as an indicator, the broader foodservice end markets, I think if you look at foot traffic, we look at foot traffic as one of our indicators down close to 4%. And if you look at our performance, we were substantially less as low single digit, 1.5 ish type down on the units for foodservice end markets. And if you think about kind of the early days of Q2 here and our key customer earnings reports on the foodservice side. It's no secret that they're beat up right now and that there needs to be a change.

Speaker 3

And so back half, volume recovery for us and kind of what we're anticipating is kind of that low single digit recovery. So promotional activity, we've seen inventories get healthy here over Q1 with our customers. And we fully expect that the joint kind of recovery would be the value they're trying to create the supply chain, our customers are creating the supply chain, creates the ability for them to promote and we'll see that come through largely in that low to single digit recovery with the end customer.

Speaker 6

Thanks for that. And then your comments on the customers less able to push pricing and focusing on the cost structures, Maybe you can expand on that. And then just a corollary to that would be, if your foodservice customers start stressing the value portion of their menus, which seems to be the case just judging by the comments they've made this week. How does that impact you, if at all?

Speaker 3

Yes, it definitely has an impact. We reported in Q4 that we started to see the customer approach start to shift. They certainly are looking for ways to create value and they've turned to their vendor bases and so we're not insulated from that. And so as we partner with our customers, we're looking for ways to help them, to create value within their own portfolios and then b, there certainly continue to be pressure on the entire cost structure. So I would say that has certainly ramped up here in Q1 and we don't expect that to slow down in Q2.

Speaker 3

So yes, I think you get that right. I don't anticipate a shift in their inventory approaches or anything that would make the supply chain more fragile, but I do expect that they're going to our customers and certainly we are looking to leverage our inventory health to grow sales and promote the customers the traffic, especially in foodservice.

Speaker 6

Okay, perfect. Thank you so much.

Speaker 1

And one moment for our next question. And our next question will be coming from Phil Ng of Jefferies. Phil, your line is open.

Speaker 7

Hey, guys. Mike, I guess, piggybacking on Ghansham's question, where perhaps you're seeing your customers under more stress. Is that largely a foodservice comment because a lot of the packaging companies that have more food and beverage consumer staple exposures are talking about, hey, the destock happened in Q4, things are kind of bottoming out in 1Q and perhaps getting a little better in 2Q. Just kind of help us contextualize perhaps where things are a little more choppier and how we think about the back half, I guess, perhaps?

Speaker 3

Yes. Thanks for clarifying that. It was certainly a foodservice comment. I kind of took Ghansham's question specific to foodservice. And yes, I would say it's more mixed broadly.

Speaker 3

So we do a little better than half of our business is foodservice and the other bit is our food and beverage merchandising segments. And so those segments largely it's a mixed bag really. And so destocking, I would agree with your comments on the destocking largely being over and we've now seen real normal seasonality and the normal consumption trends happening. So heading into Memorial Day, Mother's Day, Father's Day, we're seeing protein season kick in, grilling season with our protein business. Eggs has been really strong as the lowest cost protein in the market.

Speaker 3

Produce season is ahead of last year, and it's ramping up sooner as we enter Q2. So that's a good thing. If you think about last year when we had all the flooding, which delayed the berry season and the fresh produce season, which we participate in. And then we've also to the mix point, we participate in retail. And so we still see a very depressed baked goods, bakery with the consumer electing to spend their discretionary dollars elsewhere than on sweets and discretionary cakes and those kinds of things.

Speaker 3

So hopefully that I think I answered your question with that.

Speaker 7

Okay. But in terms of volumes for your food and beverage, food and beverage merchandise segment, I know there was some noise with the compares with the mill that you're and business you're exiting. But like on an organic basis, apples to apples basis, we shouldn't expect your volume cadence until you beat the word to be softer, right, on a year over year basis, maybe some modest improvement?

Speaker 3

Yes. We're flat to maybe low single digit improvement. Yes, that's

Speaker 4

what we're looking at.

Speaker 7

Helpful. And then one question for John. You gave some color in terms of how to think about the first half versus back half shift of the year from an EBITDA standpoint. It sounds like 2Q will in all likelihood be down a little bit on a year over year basis. Do you inflect positively by 3Q?

Speaker 7

And what are some of the things that you have at your disposal? I know last quarter you were talking about playing catch up on cola. We're obviously seeing some movement on inflation on resin, but just kind of help us think through the EBITDA cadence on year over year basis in 2Q kind of progressing in 3Q? And certainly you guys sound pretty upbeat about the back half. Yes.

Speaker 4

No, thanks. It's a good question. So I think that's the right way to think about it. Q2, maybe I'll just start with Q2 and then we can talk about the back half a bit further. So Q2 does benefit from seasonality on a sequential basis.

Speaker 4

And then if you look at year over year, volumes are relatively going to be flattish, building on Mike's comment. One thing to note about Q2 as it relates to just kind of EBITDA, we do I mentioned that we had the Pine Bluffs planned outage that was completed in April. And the net effect of that is probably $20,000,000 impact to Q2. That's complete behind us. We don't have any other planned outages for the remainder of the year.

Speaker 4

And then if you look at Q2, we still are in impact of inflation on food prices, consumers still being felt. We're seeing that still in April. I think as you kind of go on to the back part of the year, we're expecting some of the actions that we've talked about to build some volume momentum in the second half. And so part of that is on the top line. We talked to Mike answered the question around customer wins during the call.

Speaker 4

So we are expecting some of that to start being felt. And then the cost initiatives, as you mentioned, the COLA does have a bit of a lag effect. We tend to do some of our labor increases at the start of the year. And as those labor kind of add backs come back in, you'll start seeing that kick in more as the year goes on. Plus we have several cost initiatives that are underway and those do take a bit of time to start recognize that in the P and L.

Speaker 4

But we expect several of those cost initiatives and cost savings to start building up throughout the year. And when I'm talking about some of those cost savings, even just bifurcating that, there is PEP's continuous improvement. Those are initiatives that are underway and those are more than just back half of the year benefits. Those are longer term programs that we have in place that we believe we'll continue to see some savings on. And then just also to delineate the footprint optimization, which is the bigger program we introduced last quarter.

Speaker 4

I mentioned last quarter's call just to reiterate

Speaker 3

a lot

Speaker 4

of those benefits will be seen really starting 2025, although we will see some benefits of that program kick in Q4.

Speaker 7

Okay. Appreciate the color guys.

Speaker 2

Yes. Thank you.

Speaker 1

And one moment for our next question. Our next question will be coming from Arun Viswanathan of RBC Capital. Arun, your line is open.

Speaker 8

Great. Thanks for taking my question. Just wanted to maybe get your thoughts on food bev merch. It seems like there's been some improvement there and you guys are still going through some restructuring, but it's nice to see a little bit of improvement there. So maybe it sounds like foodservice could be a little bit softer, but what are you seeing on the food, beverage side?

Speaker 8

Thanks.

Speaker 3

Yes. I think in the food and bev merch, it's like I said in the prior question, it's still mixed. I think we're ahead of where we could be given year over year seasonality. So I mentioned the ag season. I think the biggest thing you're seeing improvement wise in our food and beverage is some pricing fidelity.

Speaker 3

And so as we've kind of eclipsed some contracts and started to get some help on the price cost side, where our value over volume strategy started to come through in that business, which was a little behind our foodservice business, if you recall from the Q4 call. So overall, that team is doing well. I think they're also benefiting quite a bit from the PEPs improvements we've made. And so as those operations become more stable, that's also flowing through.

Speaker 8

Great. Thanks for that. And then I guess just on price cost, resin prices may have maybe ticking up here

Speaker 3

a little

Speaker 8

bit. Obviously, you guys have pretty robust pass through mechanisms, but maybe you can just give us your thoughts on potential volatility, if that would cause any volatility on your margin side and what maybe your outlook is for the next couple of quarters?

Speaker 4

Sure. In terms of some of the impact of kind of inflation impacts on resins, we are seeing some of that. I think we're seeing on a cost perspective in probably 2 places in resin and then also on maybe on some transportation. I'll take them in pieces. So from a resin standpoint, we largely have pass throughs on the resin for the majority of our business.

Speaker 4

And so we do expect to recover that. We've made a lot of efforts to reduce the lag that we have for those recovery programs. And so really on a this year basis, you really shouldn't see much of an impact. Really where you might see it is if we have a big spike or a big decrease at the end of the year, kind of November, December and we don't recover that within the year that might have an impact on our annual results. But really anything that you're seeing come in the near mid term really shouldn't be an impact to the P and L.

Speaker 4

We do pass a lot of that through. I think the and then as it relates to the transportation, we're relatively flat. We've passed that through as well. We have some capacity as it relates to customers. Where it impacts us, it could see an impact is on our transfer freight as we move some products within our network.

Speaker 4

But we have other cost initiatives, savings programs. We're getting more efficient there, which will largely offset any impacts to the increase. So net net, we're really not factoring in anything for the year in terms of we should be able to insulate the business from any type of volatility in material pricing.

Speaker 8

And just lastly, sorry, just on the leverage. So it sounds like you guys are pretty committed and pretty confident that you will finish the year in the high 3s. Obviously, the deleveraging, I imagine will continue. So what's kind of the optimal target that you ultimately want to strive for over the next couple of years?

Speaker 4

Yes, we're continuing to deleverage. We've only put out targets for this year. We haven't put out multi year targets. But I could just say that we're not going to be satisfied in the high 3s. That's where we can get to this year and we're going to keep going.

Speaker 4

And we're looking to substantially improve. We feel like some of the actions we've undertaken to date has helped and we're continuing down that path. And even on top of that, we took a substantial action in increasing our liquidity and our available capacity under our revolving credit facility. I'll just take a minute to point that out in terms of raising our borrowing capacity from $250,000,000 to $1,100,000,000 It is something that from a liquidity standpoint, it is a substantial improvement to our overall credit profile on top of the delevering that we're undertaking.

Speaker 8

Thanks a lot.

Speaker 1

One moment for our next question. And our next question will be coming from Adam Samuelson of Goldman Sachs. Your line is open.

Operator

Yes. Thank you. Good morning, everyone. So I guess the first question, John, maybe just to be clear and try and tie together the point on the $20,000,000 cost of Pine Bluff turnaround and the EBITDA cadence during the first and second half, you're kind of implying 2nd quarter EBITDA is plus or minus about $200,000,000 would be how that works if you're at least tracking at the lower in the lower half of the full year range. Is that the right understanding?

Speaker 4

You're generally on the right track, Adam. I think if you take my comments, we're not providing explicit guidance for Q2. But what I would tell you is when you look at my comments around second half improvements of 30% plus, At the midpoint of our guidance range, that would imply $206,000,000 for Q2, roughly speaking, just the math. But we're expecting a 30% plus improvement. So really that would take you down to lower than the 206 from over 30%.

Speaker 4

And so we're tracking to that. I think the $20,000,000 of the Pine Bluff is something that will impact Q2 that's factoring into the results there or expectations there, I should say.

Operator

Got it. That's very helpful. And then as we think about the footprint optimization and the beverage merchandising restructuring, from a cash perspective, there was the beverage merchandising restructuring, the cash expenses are almost complete. There's only a couple of $1,000,000 left on doing what you had spent last year and what cash expenses this year. I just want to confirm that.

Operator

And then from a footprint optimization, there was $8,000,000 spent. And so that's still most of that program is still to come, what I presume over the balance of this year. Is that correct?

Speaker 4

Yes, that's correct. So when you we haven't changed any of our guidance for the footprint optimization as that program is really just getting underway and maybe taking pieces. The food and beverage merchandising restructuring, as I mentioned on this call, we are largely complete with that program. And so our total cash charges did end up around the $160,000,000 mark that we had guided to from a cash basis. And just to reiterate on the footprint optimization, how much of that is we're anticipating in this year, we're anticipating 2024 cash charges in the $15,000,000 to $20,000,000 area for this year.

Operator

Okay. That's helpful. And then just one final one. I know seasonally working capital ticks up in the Q1 and that's what you saw. Do you think that there is room to get cash out of working capital this year, especially given the more muted volume environment that you're seeing in the near term?

Speaker 4

Yes. I think that is the right way to think about it. I think working capital, we do expect to get some benefits there despite the negative working capital in Q1. The big piece of that clearly was some of the timing of our accounts receivable. And if you look back to last year, Q1 was had a similar dynamic and we anticipate that that should be worked through the remainder of the year and we will get some benefit of working capital included in our $200,000,000 guide $200,000,000 plus guide for free cash flow for the year.

Operator

All right. That's all really helpful. I'll pass it on. Thank you.

Speaker 4

Thank you.

Speaker 1

One moment for our next question. And our last question will come from George Staphos of Bank of America. Your line is open.

Speaker 9

Hi, thanks very much. Good morning, guys. Thank you for the details. Can you hear me okay?

Speaker 4

Yes. Good morning, George.

Speaker 9

Good morning. So two questions. 1, can you give us a sort of deeper dive into perhaps how you're integrating that, where you stand in terms of continuous improvement program there and what it could mean in terms of margin the next couple of quarters and next couple of years across the two segments? 2nd question, to the extent that freight and rail and trucking have been relatively benign, To some degree, that is it creates a competitive disadvantage for you because of your logistics and distribution network. To the extent we saw a reversal, and are you seeing that by any chance?

Speaker 9

How do you leverage your active distribution model and network to improve volume and share and competitive advantage versus your peers? Thank you guys. Good luck in the quarter.

Speaker 3

Yes, I'll take the PEPs. So good question. So we're still early days in PEPs. I just want to reiterate that. And so we've got 18 sites that are certified bronze, 3 silver, and we just had our 1st gold site in Kinston, North Carolina.

Speaker 3

And so 22 sites total certified. The program has largely been rolled out from an independent standpoint. So independent evaluations have happened across the board. So all plants are operating on the same operating system. In terms of actually value creation, so if you think about the first stage of pets, it's really about stability, George.

Speaker 3

And so having the plants all in one system, it creates the portability of talent, allows us to insulate ourselves from labor challenges and be able to move labor. And so we have a total labor management system that allows us to leverage that. And when you can go from plant to plant and understand the operating systems the same in every facility, it really allows us to leverage that. So the first phase is really about cost avoidance and stability. When you get to silver, you start to see cost improvement.

Speaker 3

Our CI teams are building 6 Sigma projects. And when you're gold, you actually have a forecasted savings that we build into the system. So with only one gold site, it's really not about the dollars today, but long term, we look at this as a lever that will do a lot more than just offset inflation and really generate that ability that lever to handle true EBITDA growth and performance. We're not there yet. We have 31 more sites to be certified and that's going to happen over the coming quarters well into next year.

Speaker 3

So no victory speech there yet, but we are seeing green shoots. We are seeing a shift in our plants ability to be proactive. And it's allowed us to really kind of stay ahead of the inflation that used to really hamper us on a Q over Q. And one of the reasons we've been able to weather some of the mixed market and inflationary pressures we've gotten is because of PEP so far. And so we expect more out of that.

Speaker 3

Too early to really quantify it, George, but it's something we look forward to update the market on.

Speaker 9

But presumably, Mike, without getting a putting a number on it, I appreciate that as you roll this out more and more and to the degree you get more stability across your system, you should get also a requirement for less working capital. You'll be able to take inventory out of the system. You'll be able to obviously produce at a more predictable level, not that you're obviously out of line right now and that should accrue benefits on return as well, which I think sometimes we don't appreciate. I'm sorry, go ahead.

Speaker 3

Yes, you're 100% right. And in fact, we are like from an avoidance standpoint and efficiency standpoint, we are seeing those things come through. But you're exactly right.

Speaker 9

And on the Pactus distribution network and whether you're able to

Speaker 4

really leverage that or not at this juncture? Yes,

Speaker 3

I'll

Speaker 4

take that one. And I think if I understand your question right, I think you're implying that without seeing more inflation in the logistics side of the business, maybe our distribution network, which is a differentiator isn't quite as differentiated.

Speaker 3

That's correct.

Speaker 5

Yes. I

Speaker 4

don't know if I would necessarily agree with that. I mean, it is still a differentiator for our business and having the built out distribution network being a light low cost distributor and having that value add to our customers. I mean to your point, it's still a value add and differentiator for us. And if pricing was to go up across the network for everyone, I suppose that that competitive bridge or the moat would only increase, but it's still there today and it's something that we are able to take a benefit from.

Speaker 3

The add I would make to this is, if you look at our foodservice business as an indicator, foot traffic was down near 4%. The fact that we're able to provide mixed product and create value that our customers don't have to rely on themselves for, regardless of inflation, continues to set us aside. And you saw that with our performance in the 1.5% type percent down on a unit basis. So we outpaced foodservice foot traffic largely because of our ability to create value partner with the customers that see that value. Now what I'd also tell you is our network is scalable.

Speaker 3

So I would tell you to your earlier question on PEPs, one of the good things about our hub and spoke network is we can adapt our plant operations to regional demand signals. We can adapt it to broader market and product trend signals. And so our ability to scale back or scale up is something that's for us been a focus and we've seen that come through as well. So whereas a big supply chain could often be a wait and economic downturn, we use it as a lever to actually adjust and scale, if that makes sense.

Speaker 9

It does. It does.

Speaker 8

Thank you

Speaker 9

for the thoughts guys.

Speaker 3

I'll turn it over.

Speaker 1

And I'm showing no further questions. I would now like to turn the call back to Mike for closing remarks.

Speaker 3

Thank you. As we close today, I want to again thank the entire Pactiv Evergreen team for their hard work during the Q1. We are executing on our strategy and we'll continue to progress on our transformational journey in 2024. We look forward to updating you during our Q2 conference call. Thank you for joining today.

Speaker 1

This concludes today's conference. Thank you for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Pactiv Evergreen Q1 2024
00:00 / 00:00